Market overview

China has been one of the first countries to implement the OECD's BEPS transfer pricing recommendations into local legislation. In September 2015, China's State Administration of Taxation (SAT) released the Implementation Measures of Special Tax Adjustment (Draft for Public Consultation). Further, on June 29 2016, the SAT issued Bulletin 42 to improve the reporting of related party transactions and contemporaneous documentation.

Bulletin 42 introduces a three-tier documentation framework, as set out in Action 13, while requiring technical analysis and consideration of positions that are familiar to the Chinese market, according to Eunice Kuo, head of transfer pricing at Deloitte.

"This reflects how transfer pricing issues are moving in China," said Kuo. "The SAT tries its best to adopt the concept used internationally as much as they can, so that China can be aligned with the other countries. On the other hand, China wants to take its unique business environment into consideration while adopting those international principles into China," she added. One way China has incorporated its own style into the BEPS legislation is the inclusion of location specific advantages into Bulletin 42.

"China will be very aggressive and take a very firm view in its position that a lot more income belongs to China," said Brendan Kelly of Baker & McKenzie. Tax authorities' strength in conducting their research and targeting audits will be boosted as well, said Khoon Ming Ho, head of tax and transfer pricing at KPMG. This will be done by greater use of technology in analysing data of comparable companies.

On the taxpayers' side, in the past, unlike foreign multinationals operating in China, Chinese multinationals did not have a high interest in transfer pricing issues. However, starting from 2016, many Chinese multinational have started looking at transfer pricing issues and the global trends, specifically with regard to outbound investments including acquisitions of foreign companies. "I think this issue was opened up by the aggressive outbound activities [of Chinese multinationals] and some of their investees in other countries have brought this issue up with the Chinese headquarters and the Chinese headquarters have been focusing on this issue which echoes the One Belt One Road strategy," said Kuo.

Tax authorities

State Administration of Taxation
No 5 Yangfangdian West Rd
Haidian District, Beijing 100038
Tel: +86 10 6341 7114

Tax rates at a glance

(As of June 2016)

Corporate income tax 25%
Capital gains tax 25% (a)
Branch tax rate 25%
Withholding tax (b)
Dividends 10%
Interest 10%
Royalties from, for example, patents and know-how 10%
Branch remittance tax n.a.
Net operating losses (years)
Carryback 0
Carryforward 5

  1. Capital gains derived by foreign enterprises from disposals of interests in foreign investment enterprises are subject to a final withholding tax of 10% instead of income tax. This rate may be reduced by applicable tax treaties.
  2. The statutory rate is 20%, which is reduced to 10% by the Enterprise Income Tax Law Implementation Regulations.

Source: EY 2016 Worldwide Corporate Tax Guide

Firm contact details

WTS China